(FORTUNE Magazine) – Unless you are a voracious reader of the news, it was a story you may well have missed. On an otherwise quiet Friday the 13th in June, the Wall Street Journal reported in its B section that the Securities and Exchange Commission had given two former Lucent employees, Nina Aversano and Bill Plunkett, what are called "Wells notices," alerts that they are likely to be the target of a civil action by the government. The following day, the Bergen Record, based not far from Lucent's New Jersey headquarters, noted the Journal story in under 300 words. And the Washington Post covered it in a single paragraph. The New York Times didn't chime in at all.

The news, however, was far bigger than the play it got. Aversano, once a high-up Lucent sales executive, had made headlines as a whistleblower who claimed she'd been fired for trying to stop the company from making misstatements about its prospects. The notion that she was now in the government's legal cross hairs was not only a strange twist in a years-long SEC investigation, but also--surprise, surprise--an actual new chapter in a once-riveting corporate scandal that had seemed to fade from notice. For a long spell Lucent had been the accounting blowup that time forgot. And unfortunately so--for it is a case that offers no shortage of morals for today's shareholders.

It was way back in December 2000 that Lucent reported it had overstated its revenues for its latest quarter by nearly $700 million. The headlines rolled then in a size and blackness that fit this company's fame. Spun off from AT&T in 1996 and taking with it icon Bell Labs, Lucent caught the telecom boom just right, riding it to $258 billion in market value. By 2000, Lucent had more shareholders, 5.3 million, than any company around.

But by then Lucent also was losing market share and missing its earnings targets. Behind the scenes there was denial: Richard A. McGinn, Lucent's CEO, a salesman to the core--and a man who had just used $45 million of Lucent's money to build a golf course near its headquarters!--kept optimistically talking about "recovery" and driving to make it happen. He blamed his managers for poor execution when the problem had deeper roots. Employees reacted by manufacturing cotton-candy "revenues" and the profits that tag along. So now this mighty company was saying, just like some two-bit player, that it had cooked the books.

Not by a small amount either. We didn't know in late 2000 about the colossal scandals to come--about Enron, or HealthSouth, or the unimaginable $11 billion of accounting fraud at WorldCom. So when Lucent disclosed its $700 million overstatement of revenues, for a single quarter, the figure looked--and was--enormous. Said a senior regulator then to FORTUNE: "Wow, $700 million. I think you could see some people ending up in striped suits in this one."

It is now 2 1/2 years later, and no one has donned stripes or even been indicted. Until the Aversano-Plunkett news came along, no one had even seemed about to be nailed by the SEC, which, though it cannot bring criminal charges against wrongdoers, can make their lives miserable with civil sanctions, such as forever barring them from big jobs in public companies. Even the matter of Aversano the Whistleblower has vaporized, culminating early this year in a settlement with deeply secret terms.

Meanwhile, Lucent's stock has been destroyed. From the peak of $258 billion, hit in December 1999, the company's market value has calamitously gone to $15.6 billion. (Included in that figure is $6.8 billion of current value for two companies that Lucent recently spun off, Avaya and Agere Systems.) And to people like Lucent's erstwhile chairman, Henry Schacht, that anemic $15.6 billion figure, reflecting a $2.13 share price for Lucent, looks almost thrilling: The company's shares got down to roughly a quarter of that in 2002.

Most of the stock's cratering, of course, is not attributable to fraud. To anyone who will look, Schacht displays a colorful chart tracking his industry. The chart shows that in mid-May, 30 large telecoms (including Lucent) had from their peaks lost a stunning $3.8 trillion in market value. Schacht's point, at heart, is that you didn't have to be charged with wrongdoing to lose huge value. Nevertheless, Lucent was charged--and so far no individuals but its shareholders are taking the rap.

That is the maddeningly unfair aspect of today's corporate scandals. Inanimate, Delaware-incorporated creatures like Lucent don't commit crimes. People do. Sometimes they leave their fingerprints all over the scene--there is certainly some of that in the Lucent saga. And sometimes they just instill a "tone at the top" that can encourage employees to go too far--and there is that in Lucent too. In either case, punishment is typically delayed or may be too light when it comes or may not fall at all on a principal player. Meanwhile, the small investors who thought they couldn't go wrong with a piece of Bell Labs, and all the onetime AT&T shareholders (the proverbial "widows and orphans") who unwarily tucked this spinoff into their portfolios, and the entire continuing horde of Lucent shareholders--4.7 million of them still--suffer. This outcome is not fair when it falls on a single person, much less on more than the combined populations of Los Angeles and Detroit. But it is the miserable way the system works.

If punishment is now finally coming, it will probably fall under the rubric of "revenue recognition," meaning that certain employees will be accused of booking revenues that didn't deserve the name or wrestling them into quarterly reporting periods where they didn't belong. Criminal charges remain possible: Lucent says the U.S. Attorney for the District of New Jersey is conducting an investigation into what some of the company's employees did.

But when all the targets become known, they will almost surely not include the man once at Lucent's top: Rich McGinn, 56, who was fired as CEO two months before the $700 million disclosure. McGinn, says Schacht, was not fired for doing anything illegal and hasn't since been found culpable. No, the signal event in McGinn's life after Lucent is that he collected $12.5 million in severance. If you are a bigtime CEO, true, getting fired is ignominious stuff. But $12.5 million certainly makes the going easier.

McGinn's escape raises real questions about the nature of guilt in these affairs. By a definition that could rationally be plugged into every corporate dictionary, McGinn did do wrong--by demanding too much. In 2000 he pushed his managers for results they could not deliver--not, apparently, without some crossing a legal line. The pressures that McGinn applied were described in the complaint that Aversano filed, which charged that he and the company had set unreachable goals that caused them to mislead the public. Obviously that was an adversary's claim, undermined in addition by the SEC charges that may be made against Aversano. But McGinn's push was acknowledged as well by Schacht, now 68, who had preceded McGinn as CEO, stayed on the Lucent board, and returned to take over when McGinn was ousted. Talking two weeks later to his top managers, Schacht said that under McGinn, Lucent was "driven by Wall Street expectations that were beyond the capacity of the company to meet." Schacht spoke also of complaining customers he'd just interviewed and the damage done Lucent: "What has happened to us is that our execution and processes have broken down under the white-hot heat of driving for quarterly revenue growth."

Looking back today, Schacht says carefully that McGinn's regime may have included "bad judgments." Some of those in fact got him fired. In October 2000, just after Lucent had ended its 2000 fiscal year, and seen its stock fall by almost 75% in ten months even before the company had unearthed any internal wrongdoing, McGinn was still talking about "recovery." Lucent's board had by then had its fill of McGinn's optimism and thought that what was needed instead was a sober restructuring of the business. So McGinn was out.

Today McGinn is a partner in RRE Ventures, a private equity firm founded by James Robinson III, who once headed American Express and got shoved out himself. McGinn, who refused to speak with FORTUNE on the record until just before presstime, said he had always been tough on unethical behavior at Lucent and that he did not "overreach" in 2000. He describes Aversano's account of her firing as "pure fantasy." The problem with Aversano, he says, was that she was not up to the job into which he had promoted her--"My mistake"--and kept proving it by failing to deliver.

The voluminous documents in the Aversano case, though, suggest that the situation was more complicated. There was something in Rich McGinn that couldn't accept Lucent's fall from its early triumphs. He described himself once as imposing "audacious" goals on his managers, believing the stretch for performance would produce dream results. Henry Schacht defends McGinn's thinking to a degree: "The job of the CEO is to lift the sights of the people under him." Schacht also points out that while McGinn was CEO, he never sold a share of Lucent stock (except once in connection with options that were expiring). But asked about "tone at the top," Schacht nods confirmingly, indicating that it was a problem to be reckoned with.

Compounding Lucent's troubles were a growing number of shareholder suits. They were so multitudinous and in need of order that they were eventually tagged Lucent 1 and Lucent 2. And then there was Aversano.

Lucent 1 occurred because Lucent's own private bubble burst, ahead of telecom's, in the first quarter of its 2000 fiscal year. Up to that time Lucent had both grown mightily and been a champion--for 14 quarters--at beating analysts' expectations. Most analysts were thinking that the 15th quarter, ending Dec. 31, 1999, would be another rouser. But on Jan. 6 of the new year, Rich McGinn grimly announced that Lucent had run into special problems during the quarter--including disruptions in its optical networking business--and would report both flat revenues and a big drop in earnings. That day the stock fell by 28%, losing a colossal $64 billion.

There was no hint of anything nefarious, but that doesn't matter much in shareholder suits these days. "As does night follow day," says Paul Saunders, a Cravath Swaine & Moore partner who is Lucent's outside counsel, investors filed suits charging Lucent, McGinn, and others with fraud. Saunders, though, classifies the charges as having a "plain vanilla" character: "Your stock dropped, and you must have been doing all sorts of bad things--although we don't know what they are."

At Milberg Weiss Bershad Hynes & Lerach, name partner David Bershad, who was representing one of the new plaintiffs, attacked this little problem of details by putting the firm's investigatory team, headed by a former FBI agent, to work on Lucent. That team fanned out to talk to former Lucent people and pulled together, says Bershad, a picture of a company under far greater strain than McGinn had let on in January. There was, for example, "enormous pressure at the end of quarters to report revenues," Bershad's investigators found.

The legwork that Bershad had commissioned helped get his firm appointed lead counsel when a judge in Newark's federal court went on to consolidate the cases. But the suit dragged on, going nowhere much at all. Then, in the fall of 2000, this slow-moving buggy got dramatically overtaken by both Lucent 2 and the Aversano case.

Chronologically, except for skullduggery not yet uncovered, the first move was Aversano's. Now 58, Aversano was a longtime Bell employee whom McGinn in May 2000 had made president of North American sales to the "service provider" companies--including the regional Bells and their many upstart competitors. In that important job, in this company that has been way above average in putting women into high-ranking spots, Aversano reported to executive vice president Patricia Russo.

Aversano, says a former Lucent financial executive, was a hard-charger who reminded him of still another woman, Carly Fiorina, who'd left Lucent in 1999 to become CEO of Hewlett-Packard. After Aversano was promoted, she oversaw about 3,000 people bringing in 25% of Lucent's revenues. Counting 100,000 options given her in early 2000, Lucent figured her pay for the year, so Aversano testified, at a handsome $4.5 million.

In 2000 generally, Lucent was a pressure cooker in which McGinn was trying to generate results that would offset the year's terrible beginning. In this environment Pat Russo was an early casualty. She left in August, after McGinn restructured her out of a job. Later, in a deposition, McGinn described Russo's shortcomings as he saw them: "She would give me a forecast and tell me she was going to accomplish X, and then two weeks later come back and say, 'Oh, we're not going to do X [because] what we thought was going to happen isn't going to happen.' And there were ten different reasons every time."

After Russo's departure, Aversano reported directly to McGinn and, in effect, took over the job of saying that X wasn't going to happen. An immediate challenge at that moment was the fourth quarter. McGinn had originally told analysts to expect earnings growth of 20% for the period. Then, in July, he backtracked to 15%. And now, in August, even that goal was looking unrealistic.

To cope with her part of the problem, Aversano was holding weekly conference calls to deal with "gap closure," meaning the difference between what her division thought it could deliver in revenues and what McGinn wanted. In mid-August, McGinn unexpectedly joined Aversano's call, seeking firsthand information. McGinn's wish then for the quarter, which he had built into his 15% prediction for earnings, was $5.7 billion of revenues from Aversano. But on the call she said $5.2 billion was the outlook. The next day a manager who'd been on the call wrote an e-mail describing McGinn's reaction, which was that he "went ballistic."

The steam blowing may have done McGinn some good, but not much: On Oct. 10 he was forced to report that unexpected problems had constrained revenues and that fourth-quarter earnings would actually be down by at least 25%. The revenue contribution from Aversano's group? Some $5.5 billion. But that figure, as the world was about to learn, was infused with wrongdoing.

Before that fact became public, though, Aversano had a confrontation with McGinn that led to her departure from Lucent. In depositions she has made, she claims that in mid-2000 she became more and more concerned about the sharp contrast between Lucent's desperate scrambling behind the scenes to produce revenues and McGinn's optimistic statements to the world. The scrambles, according even to Schacht, included a never-ending pursuit of "pull-ups." They typically involved special, costly deals with customers at the very end of a quarter that sucked revenues into that period, therefore making it look better than it would have otherwise. But great sucking successes of that kind put immediate pressure on the following quarter, which itself then needs a pull-up. And on and on. Aversano claims she thought time was running out for these and other end-of-the-quarter "miracles." And she became convinced, she has testified, that in hiding their existence McGinn was fraudulently misleading investors.

So on Oct. 9, in a meeting that was shortened by an interruption, and again on Oct. 11, she presented McGinn with arguments as to why his goals for fiscal 2001 were unreachable and why he needed, she says, "to come clean with the Street." McGinn had told analysts in July that Lucent expected both revenues and earnings to rise in 2001 by 20%. On Oct. 10, in between his two meetings with Aversano, he muffled that expectation, announcing bad fourth-quarter results and adding that they would "impact and lower" guidance for 2001. But Aversano claims that McGinn was still aiming way too high. The July expectation for her business in 2001 had been $25.5 billion. In her meeting with McGinn, she said the outlook, in an industry that had begun to reel, was no better than $21 billion and probably less. McGinn, she claims, dismissed even $21 billion as unacceptable. And then, according to her, he dismissed Aversano as well, saying, "I think you should retire." McGinn disputes this account, contending instead that Aversano began her sessions with him by saying she wanted to retire.

McGinn himself was ousted a few days later. In the meantime, in a fact that backs her contention that she didn't voluntarily quit, Aversano had begun negotiating what even Lucent calls a "severance package." It would have paid her $2 million over two years and also would have accelerated the vesting of some stock options. But then progress on the deal absolutely stopped, with no money paid. The reason was Lucent's discovery of wrongdoing and its belief that Aversano was implicated.

It was Henry Schacht who first got wind of bad stuff. Tall and distinguished in appearance ("He would have looked great in front of a jury," concedes Milberg Weiss's Bershad), he began his new job as CEO by diligently calling on Lucent's big customers. Among them were some of the CLECs--competitive local exchange carriers--to which Lucent had been supplying sorely needed vendor financing. Visiting one CLEC, Winstar, in Manhattan on a Friday in mid-November, Schacht dropped the dreaded news that Lucent was not going to increase its vendor financing to Winstar (which in fact, starved generally of credit, soon after went bankrupt). The Winstar executive he was talking to, says Schacht, came back with a sharp warning that Lucent might want to reconsider that plan, because "we've done favors for you."

Immediately apprehensive, Schacht asked Lucent's outside counsel, Paul Saunders, to use the weekend to examine the company's dealings with Winstar. And what Saunders and team quickly discovered was a large transaction that had taken place in the last few days of Lucent's fiscal year, ending Sept. 30, and that smelled. Ostensibly Winstar had simply bought a $125 million software pool (in essence, a license) from Lucent. But in actuality the Lucent sales team negotiating the transaction--which Lucent says was headed by Nina Aversano--had sweetened the deal by granting Winstar about $100 million in credits and price discounts to be used when it made future purchases.

In an accounting sense, the existence of the credits and discounts made this a "multiple-element transaction," in which neither the revenues nor the offsets should have been recorded until all parts of the deal were completed. But somehow the sales division did not tell the numbers crew that the tie-ins had been negotiated, which meant that accounting booked the $125 million in revenues in the fourth quarter. Cravath's Saunders calls that a "failure of communication," not an accounting fraud. When asked if that failure was intentional, he responds, "I don't know. I don't think so."

But there is no question that in the midst of the September transaction there was outright misbehavior: Someone--allegedly Bill Plunkett, a sales vice president who reported directly to Aversano--postdated the documents bestowing the credits and discounts, giving them an October date. (Plunkett, through his lawyer, declined comment.) That magically, if illicitly, transported these items from 2000, the true year in which they'd been negotiated, to 2001. It also deftly removed any timing tarnish from the $125 million in revenues. Had all this not been detected, the revenues would have stayed on the 2000 books, no questions asked.

As it was, Saunders and two Lucent executives, general counsel Richard Rawson and new CFO Deborah Hopkins (who has since gone to Citigroup), were on the phone to the SEC on Nov. 21. They said Lucent was reducing the fourth quarter's revenues from continuing operations by $125 million (to $9.2 billion), a move cutting net income by an estimated $65 million (to $532 million). They also said Plunkett had been fired and that Lucent was launching a no-holds-barred investigation to see if there was more to be confessed than the $125 million.

There was indeed. A month later Lucent announced that its investigation had shown it needed to cut fourth-quarter revenues by an additional $554 million and earnings by around $195 million. This raised the total vanishing act for revenues to $679 million and for earnings to about $260 million. The bulk of the new disappearing revenues came from transactions in the late part of fiscal 2000 in which Lucent induced two distributors, Graybar and Anixter, to buy some high-tech optical-networking equipment. By the first weeks of the new fiscal year the distributors had determined they couldn't resell the equipment and wanted to return it. Had they had a right to do so, Lucent should not have recorded the sales, amounting to $452 million. But the distributors' purchase contracts specifically said they had no such right. The contracts even said that verbal promises to take back the goods were meaningless. Still, there was some evidence, Saunders says, that Lucent people had made verbal promises of that kind. Besides, these were two important customers. So Lucent undid the sales.

By this time, just before Christmas, Lucent stock had taken new jolts from both the announcements of wrongdoing and the bad earnings news of October, falling in the wake of all this by another crunching $60 billion. And again, as night follows day, the old shareholder suits were amended and new ones came forth. A co-lead counsel, Bernstein Litowitz Berger & Grossmann, was appointed, and a courtroom christening took place: The early consolidated case would be called Lucent 1; the new one simmering, Lucent 2.

In still another major development before Christmas, Nina Aversano filed both a breach-of-contract and a whistleblower suit. The case moved forward glacially, but finally, in fall 2002, began to look as if it might be tried. Then suddenly, in January of this year, it was settled as a simple breach-of-contract action--on unannounced terms. All parties signed a confidentiality agreement so tight that lawyers for Aversano and Lucent cannot even give out case documents to reporters.

A few weeks later Lucent secured a settlement more satisfying--announcing it had reached an "agreement in principle" with the SEC's staff in which it would be charged with, but not fined for, committing fraud. That is light punishment, consistent with an SEC policy of avoiding the reinjuring of shareholders who've already ready been socked by fraud. For its part in the agreement, Lucent will sign a consent decree, neither admitting nor denying anything but promising, in any case, not to be bad in the future.

Assuming that the settlement is next approved by the commission (as it must be), the SEC may well indicate that Lucent's exemplary behavior throughout--including its immediate reporting of wrongdoing and a follow-up investigation--is a reason for its getting no more than a slap on the wrist. In contrast, when the SEC fined Xerox $10 million in 2002 for accounting fraud, it said the fine partly reflected Xerox's "lack of full cooperation" in the SEC's long investigation.

A harsher form of punishment, announced in March, is a payment Lucent must make to settle Lucent 1 and 2 and certain other shareholder, bondholder, and employee actions as well--a huge 54 cases in all. The amount advertised for this "global" settlement is roughly $600 million (including a payment, perhaps $30 million, from spinoff Avaya). But only $148 million of that, which is to be paid by Lucent's insurance companies, is cash. Lucent itself will pay, first, $315 million of stock (it has the option to pay in cash, but likely won't) and, second, 200 million warrants assigned an initial value of $100 million. The warrants, a wild card, will have a three-year life and entitle their holders to buy Lucent stock at $2.75 a share.

This total package of cash and securities is intended to be divided up among the buyers of Lucent securities in the period in which the consolidated suits charge the company with having committed fraud, which is Oct. 26, 1999 (when fiscal 1999 earnings were announced) to Dec. 21, 2000. Just how many claimants there'll be is invincibly uncertain. Daniel Berger, of co-lead counsel Bernstein Litowitz, guesses there will be upwards of 100,000. Bershad of Milberg Weiss thinks the total will be at least several hundred thousand and perhaps even one million.

Against these boxcar numbers, the $600 million figure needs close inspection. In one sense, it is very big--second, among class-action settlements, only to the towering $3.5 billion Cendant settlement. In three other ways it's small. First, it pales beside the $190 billion in market value that Lucent stock lost during the class period. Second, it is far less than the billions the plaintiffs were seeking. And third, it won't go far when it is spread among the birds feeding on it--including institutions of buzzard size. If there are 100,000 claimants, they will receive (leaving aside lawyers' fees, laughably unrealistic though that exclusion is) an average of $6,000. If Bershad's one million were possibly to materialize, the average would be $600.

In the court file in Newark, there is an outraged letter from one Salvatore Aprea, 69, of Sun City West, Ariz., who wants to know when in tarnation he's going to get something that might offset the $32,000 in Lucent losses he suffered as this decade began. Well, Sal, we hate to break it to you, but this is not a settlement that's going to change your life.

So why, you ask, isn't the settlement bigger? Very simple: Lucent's part is about the most the company could afford. This was a bloodless turnip if ever there was one. Not only did the collapse of telecom plunge Lucent into crisis, but in addition the lawsuits themselves hung over it like the sword of Damocles, threatening to administer a terminal blow. At one point during settlement negotiations, carried on for the myriad plaintiffs by an "ability-to-pay committee," the company's stock fell below 60 cents. Judge Joel Pisano, who was running the litigation, brooded over Lucent's wasted condition. Then he became a dedicated mediator who struggled to get the two sides to agreement rather than trial. And in the end the plaintiffs' lawyers, says Bershad, faced up to the fact that trial could well result in their getting a "Pyrrhic victory," in which they won their billions but Lucent didn't survive to pay. So the plaintiffs settled for their $600 million.

While all those legal troubles were consuming the company, Schacht and the Lucent board conducted a long search for a president and CEO, and ultimately, in January 2002, brought Pat Russo back. Saunders calls her "completely in the clear" with the SEC. So all she has to worry about is a management job that is prodigiously hard. Now 51, she has made customer satisfaction her highest priority. But in the workaday world she has had to deal with zero upturns in business, persistent losses, and unremitting cuts in employment. From the top (adjusting for spinoffs), Lucent has amazingly gone from a headcount of 106,000 to 35,000. Schacht himself believes Lucent "is bouncing along the bottom." The bounces extend to the company's stock: Many days it leads the "most active" list, trading in prodigious volumes. Of course, at $2.13 a pop, you can whip around a lot of shares for relatively little money.

Sometime soon the SEC will no doubt file its complaints. The company will then have to endure a version of the movie Groundhog Day, in which all those misdeeds will again draw the light. For a company that has struggled to restore its reputation, those reminders of error, says Schacht, are tough to take. But that is the price of getting it wrong in the first place. It is also a price, alas, that is paid by the crowd that never deserved to be punished: Lucent's owners.

FEEDBACK cloomis@fortunemail.com